How Canada’s Housing Market is Holding Back it’s Economy and Global Competitiveness

By James Weston
@ Real Estate Daily

April 2, 2018

Last year, Canada’s housing market helped the economy by increasing its gross domestic product growth to one of the highest rates world wide. This year, the housing market is slowing down and may be hurting the economy instead of helping it. One economist believes that the lack of affordable housing and the increase in household debt could be raising the risk of a housing slowdown in Canada. Other factors affecting the market are the tax applied to foreign buyers, a spike in interest rates, and a mortgage stress test.

Key Takeaways

This year, Canada’s housing market is slowing down affecting their competitiveness on a global scale.

Increasing household debt, low housing affordability, foreign buyer tax, new mortgage stress test, and an increase in interest rates have all been contributing to the slowing in the Canadian housing market.

One economist predicts that the Canadian housing market will not sustain the same growth it has had over the last decade.

Excerpt

Canada’s housing market was a major boon to its economy in 2017, pushing GDP growth upwards until it achieved one of the highest rates in the world. Today, things aren’t looking quite so positive.

“Canadian competitiveness is deteriorating quickly,” writes RBC Global Asset Management chief economist Eric Lascelles in his Global Investment Outlook, released this week. “The Canadian dollar should soften further in the coming year as a partial offset to this competitive shortfall.”

One major headwind facing Canadian growth in 2018? Its housing market.

“The potential headwind is the possibility of a more intense Canadian housing slowdown,” writes Lascelles. “The risk would seem to be elevated given the rapid rise of household debt in Canada in recent years and poor affordability.”

Lascelles notes that the introduction of a foreign buyer tax in the GTA, a new mortgage stress test, and an interest rate hike has taken some of the air out of the once-hot market. While that’s good for the country’s financial security, it’s not great news for its economy, at least in the short term.

“Attempting to predict the exact outcome [of where the housing market is headed] is folly,” he writes. “But at a minimum, it seems unlikely that housing will be able to continue driving growth artificially higher over the next decade in the way that it did over the past 10 years.”

Lascelles isn’t the only one taking note of the market’s impact on Canada’s GDP. CIBC senior economist Andrew Grantham predicted earlier this week that Canada’s annual GDP would grow by just 0.1 per cent in January, after home sales plunged 14.5 per cent.

“Don’t look to the housing market to carry the team,” writes BMO senior economist Sal Guatieri, in a note about what to expect for the Canadian economy in 2018. “It still needs to work off the speculative fervour that gripped much of Southern Ontario a year ago.”